B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to B2 Impact's Third Quarter Presentation. Just a few practical topics. For those of you who want to ask questions live in the Q&A, please use the second link in the invitation in today's Oslo Stock Exchange press release. You can also ask questions in the chat, but we will start with the live questions in the Q&A. So with that, I will leave the word to you, Erik.

Thank you, Rasmus, and good morning, everybody, and welcome to third quarter 2024 presentation by B2 Impact. I'm Erik Johnsen, the Group CEO. And with me today, I have the Group CFO, André Adolfsen, that will take you through the numbers. Let's go to the slide for the quarterly highlights. Normally, third quarter is a seasonally lower quarter. However, the positive trend that we have seen in collection, both unsecured as well as secured over the past quarters continued into the third quarter. REO sales were also strong with a good margin. Operating expenses for the quarter was down 7% compared with last year. We continue to have cost focus and our cost initiatives will continue to reduce costs as well as increase the scalability of our operations. We have invested NOK 1.4 billion at the end of, and committed NOK 1.4 billion at the end of the third quarter. We see higher market activity and improved pipeline, and we thus maintain our investment target between NOK 2.5 billion to NOK 3 billion for 2024. In the third quarter, we completed the refinancing that will reduce cost of debt substantially going forward. We anticipate lower financial cost of around NOK 275 million on a yearly basis or about NOK 70 million on a quarterly basis. The group has ample investment capacity in combination with a leverage ratio among the lowest in the industry. We also increased the dividend for 2023 to NOK 1.3 per share, giving a direct return of around 15% on an annual basis. It should also be noted that earnings per share of NOK 1.3 year-to-date is already in line with fiscal year of 2023. As shown on the right side of the slide, our priority for Q4 is delivering investment target of NOK 2.5 billion to NOK 3 billion. And supported with a good and increasing pipeline, it makes us optimistic in this regard. Now the key figures. Cash collection ended up at NOK 1.3 billion, somewhat down from last year, but this was expected as secured collection and REO sales are coming down as we have not invested in secured portfolios over the past years. The unsecured collection is still up. The collection so far in the fourth quarter followed the same trend as in third quarter. So good collection so far in the fourth quarter. We have strong cash EBITDA of NOK 1 billion for the third quarter. Adjusted net profit was NOK 122 million. It should be noted that interest paid on debt will start coming down substantially next quarter and into 2025. Investment ended at NOK 455 million in the third quarter. And as I said previously, we expect to reach our targets for the full year. And we are also very satisfied with return on the investment done so far in 2024. Going to the next slide. The top 2 graphs on the slide shows the cash collection development since 3Q '21 in the core unsecured markets and Veraltis countries and the corresponding FTE development in the 2 graphs on the bottom. In the core unsecured markets, we see a stable collection over time with somewhat uptick in collection in corresponding quarters at the end. The FTE development is down 20% in comparison. Collection efficiency is up, but what the picture do not show is that the platforms are now much more scalable. We have good headroom on the platforms to invest without the number of FTE to increase. In the Veraltis market, which the investment has been low over the period, we see the country has done a fantastic job in collecting despite massive adjustment in the numbers of FTEs. If you look at the group level, we are going, we have been on a top. We were 2,600 people in the group, and we are down now to 1,435 at the end of 3Q. We expect the number of FTE to go further down in Q4. Now going to the next slide. If we take the scalability that was shown on the last page and combine that with the 2 major cost drivers shown on this page, we see that B2 is well positioned at competitive cost levels for new investments. At the graph to left, we see that the stable cost level in high inflationary environment. The group has been working on numerous cost initiatives that has been driving the cost down at the same time, increasing the scalability of operations. Now it should be also noted that not all initiatives had a full impact yet, and we believe that cost will continue to be stable or come down somewhat. B2 has also now restructured the debt, and the graph to the right shows the cost of debt will continue to fall substantially in the fourth quarter and into 2025. We have, thus, substantially improved the B2's competitive position in the marketplace. Going to the next slide. This slide gives an overview of book values of NPL and REO on the balance sheet that has been coming down somewhat over the period. It shows that we have good cash EBITDA, that is the blue line on the top that has been contributing to reducing net interest-bearing debt with this, which is the yellow line. During this restructuring period with the pandemic, high inflationary period and high interest rates, B2 has been able to deliver stable to improved performance over the period. That is the green line. This leaves B2 in a very good position to take advantage of improved market position that the company currently is experiencing. And on that note, I leave the word over to Andre, that will take you through the financial numbers.

Thank you, Erik, and good morning to everyone on the call. Let me first just apologize for my voice today. Hopefully, the message will be clear. So during the third quarter, the underlying business performance has continued to be very solid. We see strong collection performance, operational cost reductions and a declining cost of debt, which will come down further in the coming quarters. So comparing to last year, we see some clear trends. In the third quarter last year, we had growth in cash collections driven by secured collections and higher REO sales. The EBIT impact of this growth was limited driven by cost inflation, and we saw that the bottom line was negatively impacted by increasing floating interest rates. In the third quarter this year, we see an opposite trend. We see cash collections trending slightly down as expected, from somewhat declining secured collections, but also lower REO sales. We have mitigated the lower ERC from secured given that we have not invested in these assets for numerous years, and we mitigated cost inflations through numerous cost actions. The EBIT is consequently up year-over-year. On the bottom line, we see a significant 72% underlying increase in the net profits compared to last year, driven by lower interest costs, which, as already mentioned, will decline further in the coming periods, and I'll come back to more details on this later in the presentation. So going more into the details, cash collection is lower compared to last year, and it is mainly driven by lower REO sales, which can vary between quarters, given the size of the assets and lower cash from joint ventures. We have year-to-date cash collected in our joint ventures, which is not reported yet, of NOK 37 million. This will be reported in the fourth quarter in addition to the normal Q4 cash flow. Unsecured collections are up compared to last year. Despite investment volumes being modest, we have seen strong collection performance on our back book and new investments are made at accretive returns. We are very pleased that the improving collection performance observed in the recent periods continued also in the third quarter. The unsecured collection performance was 108% of the latest forecast, a notable improvement compared to the same quarter last year and also in line with the guidance from our Q2 presentation. Secured cash collections came in at NOK 243 million, which includes NOK 94 million of REO sales. This is a level in line with the previous quarter, but again, down compared to last year as expected with secured ERC trending down. The underlying operating expenses was down 6.5% on a comparable basis in the quarter. Personnel costs were down 9% compared to the same quarter last year. And as Erik alluded to earlier in the presentation, the impact of the FTE reductions are not fully reflected in the numbers yet. We have seen a reduction compared to last year of 15% in terms of FTEs, and this will continue to have a positive effect in the coming quarters. The cash EBITDA for the third quarter came in at just over NOK 1 billion, including the mentioned cash flow from JVs, which will be reported now in the fourth quarter, the underlying cash EBITDA was NOK 1.150 billion, so NOK 37 million higher underlying cash EBITDA. At the beginning of this year, we presented a target to reduce our run rate interest cost. During the third quarter, we have completed all the initiatives in the refinancing plan. And we are happy to be able to present a reduction of 30% in the run rate interest cost, which will improve the bottom line in the coming quarters. The earnings per share year-to-date is NOK 1.3 and already in line with the full year 2023 EPS, supporting growth in the dividend capacity year-over-year. The investments came in at NOK 455 million for the third quarter, which is up NOK 27 million compared to last year. We also have commitments for the remainder of 2024, taking the invested and committed amount to NOK 1.4 billion for the full year. And we expect to be active in the market for the remainder of the year. Summing up the financial performance, we see net profit or bottom line growth supported by significantly lower OpEx and interest costs, which will, of course, improve even further in the coming quarters. On Page 10, we elaborate a bit more on the collection performance and the collection trend. And we do see an overall solid collection environment across our markets, especially with an improved unsecured collection performance observed over the last 12 to 18 months. Unsecured performed, as mentioned, at 108% of the latest forecast, and we do observe a similar trend so far in the fourth quarter. We should expect to see the Q4 unsecured collection performance above the 104% reported last year. On secured cash collection, it remains stable with REO sold comfortably above book values. As we have touched upon, we have made limited new investments in secured. We also see some larger REO sales last year, which we did not have this quarter. Secured collections typically fluctuate between the quarters given the size of the claims. Considering the decline in secured ERC, the level of cash collection in the quarter reflects an improved collection rate and a solid performance by the secured team. On Page 11, a bit more details on the cash flow in the period. Cash earnings in the quarter came in at NOK 224 million, adjusted for portfolio investments, financial expenses and tax. But the key takeaway this quarter is that in the coming periods, we will see improvements in the consistent strong earnings driven by further improvements in OpEx scalability and significantly reduced interest costs. This will support investment growth without any notable increase in leverage. Moving to Page 12 and the operating expenses. Over the last 12 months, we have seen our cash revenue increase by 7%. And at the same time, operating expenses remained flat, resulting in an improved operating margin. In the third quarter this year, we start now to see the impact of all the cost initiatives we have across the group. Personnel costs are down 9% compared to the same quarter last year on a comparable basis and it's expected to decline further in the coming periods based on 15% reduction in FTEs year-over-year. As mentioned in our second quarter presentation, we had increase in legal cost collection in the first half of the year, and this is expected to normalize in the second half. In the quarter, we see these costs down 2% compared to last year. We have booked nonrecurring items in the third quarter of NOK 31 million in connection with the cost reductions, which are mainly related to severance pay. On Page 13 and portfolio investments. All the investments in this quarter were related to unsecured assets, and we continue to see secured ERC trending down as a percentage of the total. The unsecured ERC is now 85% of the total ERC. As mentioned, the investments in this quarter was NOK 445 million. This is up compared to last year and the investments are made at accretive terms. The full year invested and committed amount was NOK 1.4 billion at the end of the quarter. Q4 is seasonally the most active quarter in terms of investments, and we maintain our full year target of NOK 2.5 billion to NOK 3 billion. On Page 14, I would like to provide some more details on the impact of the refinancing on our capital structure and cost. The refinancing plan was concluded step-by-step with some key deliverables. The first was to make sure we agreed a solid and extended RCF agreement with our banking partners. Then we have repaid and terminated the senior financial agreement with PIMCO. We have refinanced 2 of our outstanding bonds and issued 2 new bonds of a total of EUR 350 million, replacing EUR 500 million. The recent bond issue was done at a very favorable margin of 390 basis points and later also followed by a tap around 360 basis points. The credit spread has further improved since the latest issue. Lastly, we have secured long-term fixed interest rates now with a hedging ratio of 77% and an average duration of 3 years. All in all, we are very pleased with the current capital structure, which provides a lot of flexibility, access to liquidity and no short-term maturities. On Page 15, I would like to give also some more details on the financial impact of the completed refinancing plan. So we communicated at the start of this year that we target to significantly reduce our interest cost compared to the run rate at the end of 2023. The target was to be fully based on company-specific actions and not dependent on a potential decline in the floating interest rate. Today, we can present a reduction in the run rate of NOK 275 million compared to the target of NOK 200 million. This will have a full impact from the first quarter next year, and we lower the quarterly interest cost by around NOK 70 million or approximately NOK 50 million compared to the third quarter this year. In the fourth quarter this year, we will see the interest rate come down to just below NOK 200 million compared to NOK 290 million in the third quarter this year. The lower interest cost is also secured for a longer period, driven by, first of all, a 3-year average duration on our interest swaps. We have extended the RCF, but also have a 2-year extension option, no short-term maturities and of course, access to an improved credit spread in the bond market. So before I give the word back to Erik to summarize the presentation, I would like to thank the group treasury and finance team for all the work and support in planning and executing this refinancing plan. And of course, all the work put in this year by everyone in our skilled finance team. It has been a great team effort and the outcome is even more successful than we planned for.

Thank you, Andre. And now over to the summary and the key takeaways. We've seen that we've been having a solid underlying collection performance. And as I mentioned earlier, the pace in Q3 seems to continue into Q4 at the same trend. So good collection going into the fourth quarter. We have lower operating costs and higher operating scalability that we have shown, and that will continue. We have completing refinancing and the finance team has done a terrific job, of also then been able to lower the cost of debt for the group. We have increased dividend capacity as also shown; we have shown that we will have increased dividend capacity for the coming year. And investment activity and target for 2024 is maintained. Pipeline looks good. And as this is my last quarterly presentation for B2, as I announced, I'm going to step down as the CEO on 1st of December. I want to say that it's been an honor to serve as CEO for B2 Impact. I want to thank all employees for their fantastic contribution during my time as CEO. It's been a journey that it's been bumpy, but we have been coming through with flying colors. I also want to thank our RCF banks and the financial community for support in this period. I believe the company is in a good position to aspire, and I wish my successor, Trond Kristian Andreassen, the best of luck on the journey going forward. So on that note, we open for questions.

[Operator Instructions]

Then we start the Q&A. We will then start with those calling in. I will then give the word to Ulrik from Nordea. The floor is yours.

A couple of questions here from me. Just on the interest rate cost, you say Q4 cost is below NOK 200 million, but is this included the amortization fee? And what is the new run rate of the amortization fee?

That is interest cost and commitment fees I'm referring to. It's not referring to amortized fees. You can expect amortized fees to be in line with previous periods.

Okay. Great. And then I was wondering if you could be a bit more specific on what markets are driving the overcollection on unsecured. And also, you need to step it up quite a bit. You go several years back in time to find the investment level that you need to reach your target for this year. And I was just wondering how you see the competitive situation because a lot of your peers have been talking about that the funds now are more active and there's actually been some pressure on gross IRR. So any flavor you can add to that would be helpful.

Yes, I can start and then Andre and Rasmus can fill in. We see that throughout most of our markets, we have a very good collection. Specifically, we're not going into each of the market, but on a general basis, we see an overcollection and overperformance in the markets. We also see that some of the initiatives that we have done in some markets has been very positive on the collection side. Generally, we have seen that the pipeline that we're looking at now looks very positively. It's quite large. And we have quite a few portfolios at this point in time that we are looking at that we believe that we will reach our target of NOK 2.5 billion to NOK 3 billion investment for the year. In some markets, it's a variation between the markets at what levels the IRR at and also the difference is somewhat also between the different portfolios. Some markets, there has been IRRs coming down a little bit, but we are still investing at IRRs that is, let's say, higher than prior to the pandemic. So we are comfortable with the levels that we are investing at this point in time. And if you look at the investment that we've done in 2024, it's been comfortably above the levels that we saw prior to the pandemic. So we believe that the market is good and it's going to continue to be good for the coming periods. Do you want to add something?

Okay. I think you covered it well. So unless you have any follow-up questions, Ulrik.

Yes, just, so basically, a little bit what you're saying is that you're not seeing any big changes this year to the competitive situation or external money coming into the sector?

Well, there is some of our competitors are not investing at the same level that also that they have been announcing. And there is some external money coming into the market, but some also money has been leaving the market. So on an average basis, and we are investing around EUR 300 million on an annual basis around there. And that is good headroom for us to do accretive investment at that level. And when it comes to our competitive position, I think we've been going through that on some of the slides, both on the cost side as well as the interest rates level that we have for our debt is very competitive in the marketplace at this point in time.

It's also fair to mention the typical portfolios we buy is not necessarily attractive for the funds given the size. The size is quite small. So we normally see competition from industry players on those transactions.

All right. That's very clear. And just, Erik, since it's your last presentation, I want to say congratulations on how you managed to put B2 Holding in a very solid position, especially compared to a lot of your peers. So well done and we'll miss you.

Okay. Thank you very much.

Thank you, Ulrik. Was that all from your side? Then we go to Gustav Larsson from Arctic.

Just a question on the performance here related to the Q3 trading update previously released in October. You said you expected secured cash collections above Q2, and now they were slightly below. You commented a bit on timing on cash from JVs. But can you say something more on what the delta here for the deviation was compared to your expectations ahead of the quarter?

The cash from security is more or less in line with the previous quarter. The only difference is one REO we expected to close, which moved into the fourth quarter. That's a major difference. And on the cash from JVs, this is cash collection we have in the bank accounts in our SPV, but it's not moved into our bank accounts, which we have to do to report it as cash collection. So it's just a technical thing. We have the cash, and it will be reported as cash collection, that is NOK 37 million in the fourth quarter. So I guess I mentioned that earlier. The underlying cash EBITDA was NOK 37 million higher in the quarter. Was that clear?

Yes. Next question here regarding interest costs going forward and the hedging ratio. It's at 77% now. Is it the correct interpretation then that further decreases in base rates will not benefit you? Or have you already cemented a level that is lower than the current market rates?

We have a reduction of almost 1 percentage point or 100 basis points compared to the current floating rate. So the floating rate has to come down quite significantly for us not to benefit from those swaps.

Last question here, a follow-up on the investments and the level. You have NOK 650 million in cash, and you paid the dividend here in Q4. And now you're guiding for investments above NOK 1 billion. How will you finance this? To me, it seems you would need to increase investments in Q4 to reach guidance?

We have a liquidity reserve of around EUR 200 million, and we also have cash flow - expected strong cash flow in the fourth quarter. So we're currently in a position where we're able to invest at that target without issuing any new debt.

Okay. That was all for me. So I would also like to say thank you to Erik for these years, and I hope you get to spend a lot of time on the golf course going forward.

I'm definitely going to spend a little bit more time. That's for sure. But thank you very much.

Thank you, Gustav. We will then turn to the questions in the chat. We will start with Fredrik Skjerven from ABG. I believe this has been fairly well answered, but we can probably maybe give a bit more color. ‘In the report, you mentioned that the pipeline into Q4 has increased volume and large one-off transactions. Can you give some flavor to this statement?

I think we have answered this. Q4 is the most active quarter normally for investments. And we see quite an active, I wouldn't say pipeline, but an active market for us across all our markets. So we have a lot of opportunities.

Yes. I would say it's a good pipeline. And we have some larger one-offs that has come into the market. It should also be noted that we have closed some forward flows deals that is also going to make us in a good position for going into 2025. So some of the deals that we have closed in this quarter is not only for the last quarter, but it's going for 2025, too. So we see higher activity on a general basis and not only in selected market, but more or less in all markets. So for us, with the level of investment that we have, we have quite a few portfolios to look at.

I think we can also say that the investment team is very busy these days, so not saying more. Okay. Fredrik from ABG also had a follow-up question regarding the FTEs, if we have a target in terms of number of FTEs year-end '24 and year-end '25.

Well, I think you will see a reduction on some of the things that we have, it's been announced internally, about around 40, 50 less FTEs at the end of the year. Some of the changes will take go over time due to the fact that we also have some processes related to data analytics and so on. We also see that we optimize quite a bit of or digitalized hours, quite a few of our processes and then after that, we see that we are able to further reduce. But this will be done in, let's say, in cooperation with the countries and the management there to see how can we optimize the operational side of the group going forward.

Very good. We have a question here from [Jo ] from Swedbank Capital Markets. You continuously deliver a strong collection performance versus your dynamic forecast. What should we think about your collection projections? Are they a bit conservative? Or does B2 Impact have superior collection abilities?

I think what we're seeing is a combination of some of the countries that has been improving on the collection side, but also we see that our collection effort has also been improving over the past periods. We have been notably above the collection curves currently. For next quarter, I still believe that we're going to have good collections and somewhat about the collection curves, I think, is anticipated going forward. But our projections, it's difficult to say how it's going to fluctuate. But so far, we are doing very well.

And we should also highlight that we continue to write up our curves on the unsecured side. This we have done almost all quarters. So that increases the curve. So we have quite a lot of improvements in our core business, but we also see, as Erik said, some countries which have not performed up to the standard expected, starting to improve. So obviously, we will continue to increase our estimates if we see a trend over time and that we have done also each quarter so far.

Very good. I think the remaining questions in the chat have already been answered sufficiently. Should you have additional questions, please send me an e-mail. You will find my contact details at the end of the presentation. So I think with that, we conclude the third quarter presentation. Thank you, Erik, for a very interesting and long journey together. I wish you all the best. And thank you to everyone who's been listening to this presentation. We see you again in 3 months.

Thank you very much.

Thank you.